Nuveen’s real estate balancing act

Global manager Nuveen Real Estate is expanding its third-party capital management. Arshiya Khullar sat down with Mike Sales, head of Nuveen Real Assets and Real Estate, to understand how the firm juggles its internal client with its external responsibilities

When TIAA assumed full ownership of the-then TH Real Estate, the real estate investment manager had $27 billion in assets on its books. The retirement income and life insurance provider to US teachers bought Henderson Global Investors’ remaining 40 percent stake in the firm in 2015.

Now, the re-branded Nuveen Real Estate’s AUM has grown to $125 billion, including listed securities. A crucial part of that growth has been a push toward third-party capital management. PERE understands Nuveen Real Estate manages around $55 billion of external capital, while $70 billion is still affiliated to TIAA through its general and real estate accounts. The manager’s team has a challenging balance act on its hands between serving its parent and principal sponsor, and an expanding number of outside capital providers.

Sales has ambitious plans for Nuveen

Q: Was Nuveen Real Estate a net buyer or seller in 2018?

We were net buyers in Asia and neutral for Europe and the US. We had $8.8 billion of net flows in 2018, predominantly driven by commercial real estate debt – around 70 percent. The debt composition will probably be the same this year.

Q: What are other key target sectors and markets for the next year?

With real estate debt being 70 percent of our investment target, we will invest the remaining capital across Asia logistics and the Tokyo multifamily sector. Then in Europe, we are targeting build-to-core development in Berlin, Paris and central London – which we think will provide attractive opportunities despite Brexit. We have launched two partnerships in the student housing sector in Australia and Europe that we will eventually look to move into some form of a fund structure and include other forms of living as well. In the US, New York is an interesting market because it is relatively opaque. We have teamed up with operators and are looking to raise a real estate fund.

[For sectors] we are more cautious on the retail market and are trying to work out what type of retail will be future-proof. The outlet malls sector is the only retail type we continue to be proactive in in China and Europe.

Q: Nuveen has ambitious global expansion plans. In Asia-Pacific, for instance, you aim to triple your AUM to $9 billion in five years. Was building a global portfolio part of the reason TIAA decided to acquire a full interest in TIAA Henderson Real Estate in 2015?

Yes, it was part of the rationale for the real estate deal. After the Henderson business was acquired, six months later TIAA bought Nuveen [Investments]. And so, it was all about externalizing and having a third-party element to the TIAA business. And so, on the real estate side, it was all about creating a global third-party business as well as getting diversification and returns to the general account. But we have an arm’s length contract to the general account that treats it just like any other client. They are just another LP to us, even though they are our owner effectively. We have what you would expect to see: a typical [investment management account], and they are part of the same allocation process for any of our funds.

Q: Is it a given that the TIAA general account commits capital to every fund that Nuveen raises?

No. It must tick somewhere the general account wants to invest and the type of strategy it wants to be in, and generally that is long-term. Our open-end city series, for example, is really like the general account’s core diversified strategy of investing in core, high-quality assets. But you will not see them in too many of our opportunistic or value-add funds, albeit sometimes they do. For example, we run four logistics funds for German investors and they are not in any of them.

Q: What is the biggest advantage of managing an institutional investor’s general account besides access to capital?

It is an advantage to have capital that is part of the same organization that you can talk to and are charged with delivering a real estate strategy for. Undoubtedly it is an advantage, but we do not go to them for everything. When we propose ideas, we do it just as we would for any other investor. They make their own decisions about what they will or will not do with us.

Q: Do you have a ceiling on how much capital TIAA can commit into any of your funds and how do you go about deciding the allocation?

TIAA general account has an allocation to real estate that will float between 3-5 percent and there is only a certain amount of money they would want to put into equity real estate. The commitments are small. For example, TIAA committed $250 million in the European Cities Fund, which is a $2 billion fund.

Q: What do your other investors think about having an in-house investor backer like TIAA?

It works two ways. They want to understand the relationship, but once we tell them we have a contract with them as we do with any other investor, that they are part of the allocation process like any other investor, they sometimes view it as an advantage. Because if the general account likes a strategy and buys in early, it allows us to have capital that we can go out and tell investors we are going to be investing alongside with them with the owner of our business. It can help identify seed portfolios and be the tip of a distribution spear, if that is the right expression.

Q: What is the risk of managing these two investor types at the same time?

We try to minimize the risk by them not having any preferential treatment within the funds. There is no different treatment for the GA within the funds we run.

Q: How does it work on the fee front? Would a general account pay discounted fees?

They pay a flat fee and they get no cut. They will get the founder fees and we have obviously a broader arrangement on fees. So, they will either pay the fee that we have with them or pay the lower or higher rate of the fund. It really is whiter than white.

Q: Has there ever been any conflict of interest between managing third-party investors versus TIAA?

You cannot allow those things to happen or they will be brought to our attention quickly. We look after several funds and when it comes to allocations, these funds differ in size, style and lot size and so the conflicts are never as many as you think. We are conscious about having too many people in the same allocation space. In the US, for example, we run the real estate account and the real property fund. Sometimes they might compete for dealflow, but that is when the allocation process comes in. Also, there would be other external funds that could potentially compete as well.

Q: What are your internal set of procedures to avoid conflicts?

If there is a deal suitable for several funds in the US, then the regional investment committee makes sure a strict rotation process is followed. Let’s say there is a logistics unit that could fit two funds; someone will be first on the list and then the next available deal will go to the second fund.

Q: When TIAA acquired Nuveen, there was some employee turnover. When a firm is trying to move away from just managing your general account to more third-party capital management, doesn’t it require a transition in your team and the skill set needed?

It is fair to say we have been through a period of change in terms of restructuring the business along sector, product and geographical lines. In this time, we have gone ahead and recruited a lot of people that fit into one of those three spaces. And of course, the direction of the business has changed in terms of wanting to be far more third-party focused, and in some cases that is a different skill set. There have been a lot of comings and a few goings and we are very open about that. The transformation that has been going on has now come to an end though as we finished our product revolution. We recently also made two hires in the US to run our industrial strategy: Brian Tilton, a former Canada Pension Plan Investment Board portfolio manager, and Chad Phillips, who used to be at Guggenheim Real Estate as a portfolio manager.

Q: How does the rebranding of the company to Nuveen Real Estate fit in with this?

We have had a few names since 2014, when we sold 60 percent of our business. The rebranding decision was all about being part of a trillion-dollar asset manager like Nuveen. Although we have a number of boutiques, rebranding to Nuveen Real Estate brings clarity and allows us to leverage off the Nuveen business, particularly in the US. So, from our perspective, it allows us to go out and effectively tell people the story of what we have been up to for the last three to four years.